Economic Crises

Crisis: A Unifying Theory?

There are two main Marxist explanations of crises: the falling rate of profit school & the underconsumption/realisation problem school. I think once it is recognised that there are two types of theoretical crisis, both can be seen as offering valid explanations.

The two types of crisis are cyclical & breakdown. I realise that ‘breakdown’ is an emotive word & most Marxists shy away from it. I have no problem with it because I firmly believe that capitalism is historically limited & that breakdown doesn’t refer to something totally separate from the class struggle. I see a breakdown crisis relating to a falling rate of profit within the constraints of a finite earth. Part 3 of Volume III of Marx’s Capital, ‘The Law of the Tendential Fall in the Rate of Profit’ argues capital accumulation itself (i.e. economic growth) causes the ratio of constant capital (factories, machines, raw materials, etc) to grow relative to variable capital (labour time). This is known as the rise in the organic composition of capital. There are offsetting tendencies, but all things being equal, as the ratio grows so the rate of profit falls. Now put this in the context of supply side constraints, particularly population growth & so labour time, we can see that to offset the fall in the rate of profit under conditions where there can be no growth in absolute surplus value, the capitalists have to increase relative surplus value. In otherwords, take more of the value created by labour so labourers keep even less of the value they create. Without offsetting increases in the productivity of subsistence goods the living standards of workers fall. Under such conditions the class conflict becomes more obvious & revolutionary ideas are more appealling. An actual worldwide socialist revolution becomes a real, even likely, possibility.

But can the falling rate of profit provide an explanation for the business cycle? I don’t think so. I think once we recognise that paying with credit is not the same as paying with money & that debts have to eventually be paid off with money (at least for individuals; for corporations & governments they can only become a certain percentage of income), we can see that values can vary from aggregate prices. Once it’s realised that debt saturation has been reached there’s a credit crunch, financial crisis & then recession. I think this offers an explanation for cyclical crises (not necessarily all of them as there can be other shocks, but the abstract cyclical crisis).

None of this is to dispute that behind the current crisis of overproduction there may well be a falling rate of profit. That financialisation, even the fiat money regime, could well be a reaction to this profitability crisis. That what we have now is more than an abstract cyclical crisis. That’s not to say it’s a foregone conclusion that capitalism is entering its final days. It may be that the 1930′s had a similar profitability crisis & the advent of cheap energy (oil/electrification) along with the massive capital devaluation of the depression & WWII restored the rate of profit. This time around it’s harder to see a way out for capitalism.

All this brings us to an explanation of crisis that recognises both the falling rate of profit & the realisation problem. A unified Marxist theory of crisis.